Energy Prospectus

Opening Prices:
> WTI is up $1.41 to $89.93/bbl, and Brent is up $1.34 to $93.22/bbl.
> Natural gas is up 8.1c to $2.761/MMBtu.

AEGIS Notes
Oil

Oil grazed $90/Bbl, reaching a high not seen since November amid persistent supply concerns
October ’23 WTI gains $1.36 this morning to trade around $89.88/Bbl

The IEA and OPEC, in their monthly reports, stressed a significant deficit in the fourth quarter < IEA's deficit forecast is slightly below the forecast made by Marshall Atkins at Raymond James back in June and OPEC's deficit forecast is slightly above his forecast. Marshall's WTI price forecast is $120 by year-end.

In its tenth straight rate hike, the ECB raised rates by 25 bps and signaled this will likely be its final move
The US dollar strengthened to a six-month high, weighing on dollar-denominated commodities < Oil price move is even more impressive considering that the oil prices is fighting a rising dollar.

Wednesday's CPI showed a modest uptick in the rate of inflation, boosting bets that the Fed might keep rates steady
PPI rose 0.7% in August, surpassing July’s 0.4% to mark the largest increase in 14 months, reported the US Bureau of Labor Statistics
Additionally, China's Central Bank lowered the reserve requirement ratio (RRR) by 25 bps in an effort to stimulate the nation's economy

Diesel futures soar to highest since January amidst supply strains (Bloomberg) < Get ready for home heating oil rationing. The refineries will need to focus first on using black oil to make diesel, since our country runs on diesel. Home heating oil takes a back seat to diesel.
Diesel futures surge to $3.43/gal, the highest since January, driven by increased freight demand, reduced spare refining capacity, and low inventory ahead of winter
Additionally, EIA raised the distillate consumption forecast to 3.9 MMBbl/d for 2023 amid global supply constraints
Reduced exports of medium and heavy crudes from Saudi Arabia & Russia and a shift in refining practices could lead to a 1.5% drop in diesel yield in 4Q2023, a loss of 1.2 MMBbl/d estimates Woodmac < This is a BIG DEAL

Natural Gas

Natural gas prices are higher by 4% following warmer weather forecasts
The Winter ‘23/’24 strip is up 4c to $3.45, and the Summer ’24 strip is higher by 1c to $3.22

Lower 48 weather forecasts shifted warmer by 4.8 °F over the two-week period, with the Northeast and Midwest regions driving most of the change

The EIA will release its weekly natural gas storage report today
The median expectation is for an injection of 50 Bcf, according to the Bloomberg survey, which ranges from a low of 40 Bcf to a high of 58 Bcf
The five-year average injection for this week of the year is 69 Bcf
All injections since early July have been below the five-year average

Flows to Freeport LNG increase following cargo cancellation (BBG)
Freeport LNG feedgas flows rose from 0.3 Bcf/d to 0.9 Bcf/d as of this morning’s pipeline nominations
This follows the cancellation of three cargoes due to the facility’s outage
Higher flows to Freeport have boosted total US LNG flows to 12.45 Bcf/d, which is still slightly below last week's average of 13 Bcf/d

From one of our VERY SMART members based in New York that spends 8-10 hours a day analyzing this stuff.

Two brief observations on U.S. oil demand

September 14, 2023

Yesterday the U.S. Energy Information Administration (EIA) published data on U.S. oil supply and demand for the week ending September 8.

Media headlines focused on a 4.0 million barrel increase in U.S. crude oil stocks.

We would shine the spotlight elsewhere.

The prompt NYMEX WTI crude oil price surpassed $90 per bbl this morning for the first time since November 2022 because two other items in the data were more imperative for price formation.

Pace of two-way trade. The net build in U.S. crude inventory largely reflected the pace of trade flows. U.S. crude oil imports reportedly increased to 7.582 million b/d from 6.770 million b/d the week before. This is the highest quantity of weekly imports in more than four years (7.714, 9-Aug-2019). The pickup contributed +5.7 million barrels to incremental supply. Meanwhile, U.S. exports of crude oil and refined products tallied to 9.052 million b/d. This outflow marked a net decline of –2.372 million b/d from the outflow reported for the week before. Crude oil exports were 3.090 million b/d, or –1.071 million b/d below trend. Bottom line: world demand for U.S. crude is a key risk factor for global oil prices but still looks fine. Coming into the Sep 8 week, U.S. crude exports had been above trend in 18 of the prior 26 weeks. A breather is neither unexpected nor discouraging.

Strength of domestic demand. The latest data show U.S. domestic demand for oil improved at both the refinery gate and in end use consumption. U.S. refinery utilization increased to 93.7% from 93.1% the week before on a +177 thousand b/d increase in crude runs. On the product consumption side, we notice that cumulative year-to-date demand for “other” products is now +81 thousand b/d above last year and +1.027 million b/d above the 2010-19 average. This is not readily apparent from the demand data for the major fractions, which have been buffeted in 2023 by weather and work-from-home effects. We would direct your attention to our charts for motor gasoline and jet fuel (second slide below). Yet, “other” demand (left panel in that slide) drove growth in total product supplied last week to 20.991 million b/d. This factor is trimming the total U.S. demand contraction against last year. Cumulative year-to-date U.S. product demand is now –170 thousand b/d YoY. Bottom line: domestic demand is consistent with broader evidence of a pickup in U.S. industrial activity and restocking.

Implications

Oil markets are strengthening primarily on demand-pull through the diesel channel, not cost-push through the OPEC+ production cuts (Buy diesel, 12-Jul-2023). However, sufficiently wide margin has now opened through refinery cracks to allow crude oil prices to participate to the upside on the tighter crude availability, especially in diesel-rich sours. Alaska North Slope (ANS) crude, for example, is trading above $97 per bbl this morning. Commodity investors will want to continue to own both diesel futures and crude oil futures (Buy crude oil, 27-Jul-2023). The price for the Jan-24 ICE gasoil contract we flagged at $883.50 per mt earlier this week is now trading above $905 per mt this morning (The year of living diesely, 12-Sep-2023).

Translating these commodity economics into equity risk, from our seat it looks like investors will still want to own U.S. refiners (VLO, PSX, MPC), the major integrateds (CVX, TTE FP), and independents with strong Permian footprints (FANG, PXD). Many of these charts look like they are on the cusp of major breakouts.

The impacts of the undersupplied state of the oil market are becoming increasingly clear over time. Houston-based Bison Interests published a chart this week showing that overall U.S. crude inventories, including the 40-year low balance in the Strategic Petroleum Reserve, have now dropped to just roughly 46 days of national crude consumption, its lowest level since 1985.

Closing Prices:
> Prompt-Month WTI (Oct 23) was up $1.64 on the day, to settle at $90.16
> Prompt-Month Henry Hub (Oct 23) was up $0.028 on the day, to settle at $2.708

If oil and gas prices stay at these levels through the end of September, all of the upstream companies in our three model portfolios should report Q3 operating cash flow above my forecasts. My Q3 forecasts are based on $80 WTI and $2.50 HH natural gas.

NGL prices should also be higher than my forecasts per this chart.
https://www.barchart.com/futures/quotes/J1RU23/interactive-chart